Businesses have successfully adopted noncash payments over the past several decades. Today, for a specific high-earning and high-spending cohort of consumers[MF1] , less than 20% pay with cash[MF2] . However, there is some consumer spending that merchants have been unable to capture; the tail-end of transactions – micropayments. So what is a micropayment?
Explanations of micropayments vary, ranging from any payment made with loose change to anything less than twenty dollars. In this article, we look at what is micropayment, why micropayments are important, and how merchants can capitalize on the opportunity that micropayments offer.
What is a Micropayment?
A micropayment is a small financial transaction that involves a relatively small amount of money. The term “micropayment” is usually used to refer to payments that are less than a few dollars in value. However, the exact definition of a micropayment can vary depending on the context in which it is used.
Micropayments are often used for digital goods and services, such as online content, subscriptions, or virtual currency. They can also be used for physical goods or services, such as parking fees, vending machine purchases, or small purchases at physical stores.
Micropayments are typically processed electronically, using online payment systems or mobile payment apps. These systems allow users to make small payments quickly and easily, without the need for cash or credit cards.
Explanations of micropayments at work
There are several ways in which micropayments can be used in different industries and situations. With the gaming industry mushrooming, kids are already demanding that their parents pay them for chores in video game currency rather than cash[MF3] . Some other examples include:
- Many websites and online platforms offer access to their content for free but also allow customers to make small payments to unlock premium content or features. For example, a user might pay a few cents to read an article on a news website or pay a few dollars to access a video streaming service for a month.
- Some businesses offer subscriptions for their products or services and use micropayments to charge users on a regular basis. For example, a user might pay a few dollars per month to access a music streaming service or pay a few cents per day to use a cloud storage service.
- With the increasing hype of the metaverse, some online platforms use virtual currency as a way for customers to make micropayments for goods and services. For example, users might earn virtual currency by participating in a game or social media platform and then use that currency to purchase in-game items or access premium features.
- Physical goods and services: Micropayments can also be used for small purchases of physical goods or services, such as vending machine purchases or parking fees. For example, a user might pay a few cents to purchase a soda from a vending machine using a mobile payment app or pay a few dollars to park their car in a parking lot.
Why micropayments are important for businesses?
Micropayments can be important for businesses for several reasons. The first is to capture a segment of spending that has just recently become possible to capture, thereby increasing revenue. By allowing users to make small payments for their products or services, businesses can potentially increase their revenue by attracting more customers who might not be willing to pay a larger upfront fee.
Secondly, micropayments can be used as a way to acquire new customers by offering products or services. Those merchants that can successfully offer payment options for all kinds of purchases, allowing them to be truly digital, successfully acquires loyal customers. Starting small and then upselling those customers additional products or service offerings.
Another reason that micropayments are important is because of the friction they help reduce. Micropayments can reduce the friction associated with making small purchases, b eliminating the need for cash or credit cards. This can make it easier for businesses to sell their products or services and can also increase customer satisfaction by providing a convenient payment option competitors may not be able to offer.
This also helps with customer retention. By offering micropayments as a payment option, businesses can also potentially improve customer retention by making it easier for customers to continue using their products or services on a regular basis.
How can merchants implement micropayments in their businesses?
Micropayments are often used for digital goods and services, such as online content, subscriptions, or virtual currency, but can also be used for physical goods and services, such as vending machine purchases or parking fees. They are typically processed electronically, using online payment systems or mobile payment apps, which allow users to make small payments quickly and easily.
There are several ways that merchants can implement micropayments in their businesses. One option is for the business to adopt a strategy of accepting micropayments at the point of sale. POS terminals already have the capacity to process micropayments, and many various payments options can be used.
Another option is to use mobile payment apps, which can be useful for businesses that sell physical goods or services, as they allow customers to make payments using their smartphones.
Online payment gateways also can be used to allow merchants to accept micropayments for their products or services. These systems typically offer APIs or integration options that allow merchants to easily accept micropayments on their website or platform easily.
Micropayments can be challenging
There are also a number of potential challenges associated with micropayments. One of the main challenges is that the fees associated with processing micropayments can be relatively high, which can make it difficult for businesses to make a profit from selling small amounts of content or services. Additionally, some customers may be hesitant to make small payments using online payment systems or mobile payment apps, particularly if they are concerned about security or privacy.
Despite these challenges, micropayments are increasingly being used in a wide range of industries, including media, gaming, and e-commerce. As more and more businesses begin to offer digital goods and services, the use of micropayments will likely continue to grow in popularity.
Aren’t micropayments just another form of Buy Now Pay Later?
Many believe that micropayments are just another form of Buy Now Pay Later. In the end, customers are making small payments and have mostly been used within the eCommerce and retail segment. Furthermore, traditional financial services firms have been slow in their adoption mainly because they have been bypassed. However, there are key differences worth noting that differentiate the two payment options.
Buy now, pay later (BNPL) is a payment method that allows consumers to purchase goods or services and pay for them at a later date, often with no upfront payment required. Micropayments, on the other hand, are small payments that are typically used for low-cost items or services. There are a few key differences between micropayments and BNPL, including;
- Cost: BNPL typically involves a higher cost than micropayments, as it often includes interest or fees that are charged to the consumer if payments are missed. Micropayments, on the other hand, are generally designed to be low-cost options for small purchases.
- Payment size: BNPL is typically used for larger purchases, while micropayments are used for smaller purchases.
- Payment schedule: BNPL usually involves a deferred payment schedule, where the consumer pays for the purchase at a later date. Micropayments, on the other hand, are generally paid at the time of purchase.
- Use cases: BNPL is often used for large purchases that may be difficult for consumers to pay for upfront, such as furniture or electronics. Micropayments, on the other hand, are more commonly used for small purchases, such as digital content or subscription-based services.
Overall, micropayments and BNPL are two different payment methods that are used for different types of purchases and have different cost structures.
Growth prospects of Micropayments
The growth prospects for micropayments depend on a variety of factors, including the availability of payment infrastructure, consumer demand, and the regulatory environment.
One factor that may contribute to the growth of micropayments is the increasing popularity of digital payment methods. With the proliferation of mobile devices and the rise of e-commerce, it is now easier than ever for consumers to make purchases online. This trend is likely to continue as more and more people become comfortable with digital payments and as new technologies, such as blockchain, continue to emerge.
Another factor that may contribute to the growth of micropayments is the increasing demand for pay-per-use or subscription-based models. Businesses adopting the subscription model strategy [MF4] have been in full swing for well over a decade. Restaurants, airlines, and many other businesses have started adopting the practice[MF5] as well. In these models, consumers pay small amounts on a regular basis in exchange for access to a service or product. This type of payment model is becoming increasingly popular in industries such as gaming, media, and software as a service (SaaS).
Finally, the regulatory environment can also have an impact on the growth of micropayments. In some countries, regulations may make it difficult for small payments to be processed, which can limit the use of micropayments. On the other hand, in countries where the regulatory environment is more favorable, micropayments may be more widely adopted.
Overall, the growth prospects for micropayments are likely to be influenced by a combination of these and other factors. As more consumers become comfortable with digital payments and as new technologies and business models emerge, micropayments will likely continue to grow in popularity.
Is your business ready to use micropayments?
There are a number of factors that can influence whether a business is ready to use micropayments. Some businesses may be well-suited to using micropayments, while others may not be as well-suited.
One factor that can determine whether a business is ready to use micropayments is the type of products or services that the business offers. If a business sells low-cost items or services that are well-suited for micropayments (e.g., digital content, subscription-based services), then it may be more ready to use micropayments than a business that sells higher-priced items.
One more factor to consider is the payment infrastructure that the business has in place. If a business already has a system in place for processing small payments, then it may be more ready to use micropayments. However, if a business does not have a system in place for processing small payments, it may need to invest in one before it can begin using micropayments.
Finally, a merchant’s readiness to use micropayments may also depend on the preferences of their customers. If a business’s customers are accustomed to making small payments, then the business may be more ready to use micropayments. However, if a business’s customers are not used to making small payments, the business may need to do more to educate and encourage them to use micropayments.
Conclusion
Micropayments are small financial transactions that involve a relatively small amount of money, typically less than a few dollars. They can be used for digital goods and services, such as online content, subscriptions, or virtual currency, as well as physical goods and services, such as vending machine purchases or parking fees. Micropayments are typically processed electronically using online payment systems or mobile payment apps.
Micropayments are important for businesses because they allow them to capture a segment of spending that was previously difficult to capture, potentially increasing revenue. They can also be used as a way to acquire new customers by offering products or services for small payments and can reduce the friction associated with making small purchases by eliminating the need for cash or credit cards. Additionally, micropayments can help businesses build customer loyalty by offering convenient and flexible payment options.
However, there are also challenges to implementing micropayments. One issue is that they can be expensive to process due to fees charged by payment processors, which can eat into profits. Another challenge is that micropayments may not be widely accepted by consumers, particularly if they are unfamiliar with the payment method or if there are other convenient payment options available. To successfully implement micropayments, businesses need to carefully consider the costs and benefits, as well as the needs and preferences of their customers.
[MF1]https://datadrivenmarketing.equifax.com/cohorts/economic-cohorts/high-income/
Group J
[MF2]https://www.frbsf.org/cash/publications/fed-notes/2019/june/2019-findings-from-the-diary-of-consumer-payment-choice/#:~:text=Individuals%20aged%2018%20to%2025,by%20two%20payments%20per%20month.
Figure 7
[MF3]https://www.wsj.com/articles/robux-kids-virtual-currency-metaverse-cryptocurrency-11669929636
[MF4]https://www.ft.com/content/98618ef4-150e-11e5-a587-00144feabdc0
[MF5]https://www.wsj.com/articles/airlines-restaurant-chains-join-the-subscription-bandwagon-11648675513
